Chapter 3

Maximum Fun, Maximum Profits

In This Chapter

Deciding whether you need a budget

Discovering tips for personal and business budgets

Setting up and reviewing a budget

I don’t think that a budget amounts to financial handcuffs, and neither should you. A budget is really a plan that outlines the way you need to earn and spend your money to achieve the maximum amount of fun — or the way a business needs to earn and spend its money to make the most profit.

Should You Even Bother with a Budget?

A budget, as you probably know, is a list of the ways you earn and spend your money. If you create a good, workable category list with Quicken (see Chapter 2), you’re halfway to a good, solid budget. (In fact, the only step left is to specify how much you earn in each income category and how much you spend in each expense category.)

Does everybody need a budget? No, of course not. Maybe at your house, you’re already having a bunch of fun with your money. Maybe in your business, you make money so effortlessly that you really don’t plan your income and outgo.

For the rest of us, though, a budget improves our chances of getting to wherever it is we want to go financially. In fact, I’ll stop calling it a budget. The word has such negative connotations. I know — I’ll call it a Secret Plan.

Serious Advice about Your Secret Plan

Before I walk you through the mechanics of outlining your Secret Plan (your budget), I want to give you a few tips.

Your personal Secret Plan

You can do four things to make your Secret Plan more likely to work:

• Plan your income and expenses as a family.

  With this sort of planning, two heads are invariably better than one. What’s more, though I don’t really want to get into marriage counseling here, a family’s budget — oops, I mean Secret Plan — needs to reflect the priorities and feelings of everyone who has to live within the plan. Don’t use a Secret Plan as a way to minimize what your spouse spends on clothing or on long-distance telephone charges talking to relatives in the old country. You need to resolve issues regarding your clothing and long-distance charges before you finalize your Secret Plan.

• Include some cushion in your plan.

  In other words, don’t budget to spend every last dollar. If you plan from the start to spend every dollar you make, you undoubtedly have to fight the mother of all financial battles: paying for unexpected expenses when you don’t have any money. (You know the sorts of things I mean: car repairs, medical expenses, or that cocktail dress or tuxedo you absolutely must have for a special party.)

• Regularly compare your actual income and outgo to your planned income and outgo.

  This part of your plan is probably the most important and also the part that Quicken helps you with most. As long as you use Quicken to record what you receive and spend, you can print reports showing what you planned and what actually occurred.

• Make adjustments as necessary.

  When you have problems with your Secret Plan — and you will — you’ll know that your plan isn’t working. You can then make adjustments, for example, by spending a little less on calling the old country.

Two things that really goof up Secret Plans

Because I’m talking about you-know-what, let me touch on a couple of things that really goof up your financial plans: windfalls and monster changes.

The problem with windfalls

Your boss smiles, calls you into his office, and then gives you the good news. You’re getting a $5,000 bonus! “It’s about time,” you think. Outside, of course, you maintain your dignity. You act grateful but not gushy. Then you call your husband.

Here’s what happens next. Bob (that’s your husband’s name) gets excited, congratulates you, and tells you he’ll pick up a bottle of wine on the way home to celebrate.

On your drive home, you mull over the possibilities and conclude that you can use the $5,000 as a big down payment for that new family minivan you’ve been looking at. (With the trade-in and the $5,000, your payments will be a manageable $300 per month.)

On his way home, Bob stops to look at those golf clubs he’s been coveting; charges $800 on his credit card; and then, feeling slightly guilty, buys you the $600 set. (Pretend that you’re just starting to play golf.)

You may laugh at this scenario, but suppose that it really happened. Furthermore, pretend that you really do buy the minivan. At this point, you spent $6,400 on a van and golf clubs, and you’ve signed up for what you’re guessing will be another $300-per-month payment.

This turn of events doesn’t sound all that bad now, does it?

Here’s the problem: When you get your check, it’s not going to be $5,000. You’re probably going to pay roughly $400 in Social Security and Medicare taxes, and maybe another chunk in federal and state income taxes. Other money may be taken out, too, for forced savings plans — such as a 401(k) plan — or for charitable giving. After all is said and done, you get maybe half the bonus in cash — say, $2,500.

Now you see the problem. You have $2,500 in cold, hard cash, but with Bob’s help, you’ve already spent $6,400 and signed up for $300-per-month minivan payments.

In a nutshell, you face two big problems with windfalls:

• You never get the entire windfall, yet spending as though you will is quite easy.
• Windfalls, by their very nature, tend to get used for big purchases (often as down payments) that ratchet up your living expenses: boats, new houses, cars, and so forth.

Regarding windfalls, my advice to you is simple:

• Don’t spend a windfall until you actually hold the check in your hot little hand. (You’re even better off to wait, say, six months. That way, Bob can really think about whether he needs those new golf clubs.)
• Don’t spend a windfall on something that increases your monthly living expenses without first redoing your budget.

The problem with monster income changes

If your income changes radically, planning a budget becomes really hard. Suppose that your income more than doubles. One day you’re cruising along making $50,000, and the next day you’re suddenly making $100,000. (Congratulations, by the way.) I’ll tell you what you’ll discover, however, should you find yourself in this position: You’ll find that $100,000 a year isn’t as much money as you may think. (By the way, this business about monster income changes is true no matter what your income level. Like, if you’re cruising along making $500,000 and see your income rocket to $1,000,000, everything I’m saying here still applies.)

Go ahead. Laugh. But for one thing — if your income doubles, your income taxes almost certainly more than quadruple.

One of the great myths about income taxes is that the rich don’t pay very much or that they pay the same percentage. But that’s not actually true. If you make $50,000 per year (roughly the average household income in the United States), and you have a spouse and a couple of kids, you might pay about $1,000 in federal income taxes. If you make $100,000 a year (roughly the 90th-percentile household income), though, you pay about $10,000 per year. So if your salary doubles from $50,000 to $100,000 (perhaps your spouse gets a really nice job), your income taxes increase almost tenfold, going from $1,000 to $10,000. I don’t bring this fact up to get you agitated about whether it’s right or fair that you should pay a bunch of any extra income you make in taxes. I bring it up so that you can better plan for any monster income changes you experience. If your income spikes, your income taxes really spike. And don’t even get me started on state and local taxes…

Another thing — and I know it sounds crazy — is that you’ll find it hard to spend an extra $50,000 wisely when you’ve been making a lot less. And if you start making some big purchases, such as houses and cars and speedboats, you’ll not only burn through a great deal of cash, but also ratchet up your monthly living expenses.

Monster income changes that go the other way are even more difficult. If you’ve been making, say, $100,000 a year and then see your salary drop to a darn respectable $50,000, it’s going to hurt, too, and probably more than you think. That old living-expense ratcheting effect comes into play here. Presumably, if you’ve been making $100,000 a year, you’ve been spending it — or most of it.

But other reasons contribute — at least initially — to making a monster salary drop very difficult. You’ve probably chosen friends (nice people, such as the Joneses), clothing stores, and hobbies that are in line with your income.

Another thing about a monster salary drop is sort of subtle. You probably denominate your purchases in amounts related to your income. Make $50,000, and you think lots of the time in terms of $10 purchases. But make $100,000 a year, and maybe you often easily think in terms of $20 purchases. This observation makes perfect sense. But if your income drops from $100,000 down to $50,000, you’ll probably still find yourself thinking of those old $20 purchases.

So what to do? If you experience a monster income change, redo your Secret Plan. And be particularly careful and thoughtful.

Setting Up a Secret Plan

Okay, now you’re ready to set up your budget — er, I mean, Secret Plan.

Introducing the Budgets window

To get to the window in which you enter your budget, click the Planning tab and if necessary click the Budgets button. This causes Quicken to display the Budgets window — though the window won’t show any budgeting information because you won’t yet have created any budgets.

If you click the Get Started button, which appears in the middle of the Budgets window if you haven’t created a budget, Quicken displays the Create a New Budget dialog box (shown in Figure 3-1). You now can begin the process of creating a budget. With the sort of kindness you often don’t expect from strangers, Quicken even suggests a name for your budget and enters it in the Budget Name text box. The name will be something really clever like Budget 1 or Budget 2, but you can replace Quicken’s idea of clever.

Automatic budgets are easy but rough

When you click the OK button in the Create a New Budget dialog box, most versions of Quicken automatically create a starting budget, using any existing financial data. (This rough-hewn approach, obviously, doesn’t work unless you’ve already been using Quicken and so have some existing financial data.)

When Quicken finishes with these tasks, it suggests and displays budgeted amounts in the Budgets window for your biggest spending categories (see Figure 3-2).

To change an automatically budgeted amount, click the budget value you want to change. Quicken then opens a text box for the value and also adds little buttons you can use to fiddle with the budgeted amount.

If you do select a category to budget, Quicken adds little buttons to the Budgets window that let you do stuff with that line item’s budgeted amount:

• Rollover Unused Amounts button: Quicken lets you control how unused budget amounts either get or don’t get rolled over into the next budgeting period. When you click the Rollover Options button (which looks like two entwined arrows), Quicken supplies a menu with commands you can use to
  • Turn off the rollover of unused budget amounts.
  • Turn on the rollover of unused budget amounts.
  • Roll over only positive amounts.
  • Display help about the whole science and art of budget rollovers.

  Note that by default, rollovers don’t occur. In other words, if you underspend in Month 1, Quicken doesn’t automatically add your Month 1 underspending to your Month 2 budget.

• Apply Amounts button: If you click the button that shows a gear, Quicken displays the Apply Amounts menu with commands that let you
  • Use the budgeted amount for the current month as the budget for the rest of the months remaining in the year.
  • Use the budgeted amount as the budget for all the months in the year.
  • Edit the yearly budgeted amount
  • Calculate the average budget
  • Indicate that you want the month’s budget set to the average spending for the category.
  • Get more information with a “Help me, I’m in terrible trouble” command.
• Category History button: If you click the button that shows a tiny column chart, Quicken displays a pop-up box with two tabs: History and Transactions. The History tab graphically depicts your monthly spending for the category over the last year in a column chart. The Transactions tab (shown in Figure 3-3) lists the transactions that make up the category total.
• Calculator button: Quicken also displays a little calculator icon when you’ve selected a text box that accepts a value in both the Graph View and Grid View. Click the Calculator icon to display a pop-up calculator to make computations on the fly.

Advanced budget settings for your calendar

You can click the Advanced Budget Settings button (the arrowhead that appears just in front of the label Advanced Budget Settings) in the Create a New Budget dialog box (refer to Figure 3-1) when you want to use a noncalendar year for your budget. When you do this, Quicken adds two option buttons to the Create a New Budget Window (see Figure 3-4). You select the Use My Current Calendar Setting option to specify that you want the calendar year used as a budgeting year. You select the Use a Different Calendar button to choose a budget year that starts some time other than January.

Specifying categories for budgeting

You can add a category to the Budgets window when you’re budgeting by clicking the Select Categories to Budget link (see lower-left corner of window) and then choosing the categories you want to budget from the Select Categories to Budget dialog box (shown in Figure 3-5). Click OK when you finish with the Select Categories to Budget dialog box.

Budgeting different monthly amounts

If you want to set specific amounts for each month of the year, click the Budget Actions button and choose the Switch to Annual View command. Then enter the budget amount for January in the January Budget column, the amount for February in the February budget column, and so on (see Figure 3-6).

As you enter amounts, Quicken updates any subtotals and grand totals that use those amounts. Note that you don’t have to do anything special to save your budgeting work. Quicken automatically saves your budget for you. When you’re done working on your budget, for example, you can just exit the Quicken program or click a tab to see another Quicken window.

Reviewing the options

If you click the Budget Actions button (which appears in the upper-right corner of the Budgets window), Quicken displays a menu with eight commands that are useful for working with your budgets:

• Select Categories to Budget: Displays the Select Categories to Budget dialog box, discussed earlier in the chapter and shown in Figure 3-5.
• Switch to Graph View/Annual View: Toggles the display view of your budget between a just-the-budgeted-month view and a month-by-month-spreadsheet of the entire year.
• Budget Reports: Displays a submenu that lists the two Quicken reports that summarize budgeting information: Budget Report and Monthly Budget Report. These reports are also available on the Reports menu, as discussed in Chapter 7.
• View Options: Displays a menu of formatting options for the budget, including check boxes you can use to show cents, include reminders, and short parent categories, as well as an Edit Budget Name command that you can use to change the name of the budget.
• Duplicate This Budget: Creates a copy of the currently displayed budget and then prompts you to give the copy a name.
• Delete This Budget: Deletes the currently displayed budget.
• Create New Budget: Displays the Create a New Budget dialog box (refer to Figure 3-1) so you can begin the process of creating yet another budget.
• Budget Preferences: Displays the Budget Preferences dialog box (not shown), which you can use to control how Quicken treats transfers between savings accounts and how Quicken accounts for savings goals transactions.

Reviewing your budget

After you complete your budget, you’ll want to review your handiwork, of course. And you perform your review by using the Budgets window and its unnamed, unlabeled drop-down lists and boxes (refer to Figures 3-2 and 3-6). Which drop-down lists and boxes Quicken displays and what order these items appear in, however, depends on factors like the number of budgets you’ve created. But you’ll see some or all of the following:

• Budget name: If you’ve created several budgets, Quicken supplies an unlabeled drop-down list box in the top-left corner of the Budgets window. You use this drop-down list box to select the budget you want to review.
• Graph View/Annual View: The Graph View/Annual View drop-down list box lets you flip between the Graph View and the Annual View.
• Interval: The unlabeled budgeting interval drop-down list box in the top-left corner lets you select the interval you’re budgeting for: monthly, quarterly, yearly, quarter to date, year to date, and so on.
• Calendar: Finally, you use the unlabeled calendar box to select the specific month for Graph View.

Can I make a suggestion? If you have any questions about what the unlabeled drop-down lists or boxes do, just experiment with the various budgeting drop-down list and box options. You’ll pretty quickly figure out on your own how they work.

If a careful review of your budget shows that things have become rather a mess, click the Budget Actions button and choose the Delete This Budget command. Then you can start your work over.

What to do after you enter your budget

After you create your Secret Plan, you don’t have to do anything special to save your work. When you create a budget, Quicken automatically saves your work for you.

I talk more about using the budget in later chapters (Chapter 7, for example). If you want to print a hard copy (computerese for paper) of the budget, choose Reports⇒Spending⇒Budget. If you have a printing question, go to Chapter 5.

You’re not going to use the Secret Plan for a while. But don’t worry; in Chapter 7, I explain how to print reports, including a report that compares your actual spending with…uh, your budget.